Government financial experts have told The Treasury that they find the way pensions are calculated too complicated, according to a new report.
The Office for Tax Simplification has pleaded with The Treasury to look for new ways to tax cash withdrawals under pension freedoms.
The OTS is an official independent consultant that checks out how dozens of taxes are worked out for government departments.
Pension withdrawals for the over 55s are a complex tax issue that have triggered huge numbers of complaints.
The payments are taxed at the marginal rate – the highest rate someone normally pays income tax.
Difficulties and confusion
But if a retirement saver draws a large cash sum, HM Revenue & Customs demands emergency taxa is applied, vastly increasing the amount of income tax due.
This overpayment then must be claimed back using one of several forms and taking at least 30 days.
HMRC has defended the process, arguing collecting tax in advance and then repaying the excess is better than chasing pensioners for unpaid tax when they may have already spent the money.
“On pension income, particular difficulties arise for taxpayers concerning the treatment of lump sum withdrawals from personal pensions,” the OTS report said.
“These are an increasing feature of the pensions landscape. In addition, people who deferred taking the state pension before April 2016 have an option to receive a lump sum payment of deferred income. The government web site does not explain the special tax treatment of these payments and this causes much confusion.
£300m overpaid in tax
“More could be done to help people understand the tax implications of withdrawals from pension funds and the actions they may need to take. The OTS would like to explore this further with HMRC, in addition to working to identify options other than initial tax deduction using emergency tax codes on personal pension lump sums, which generally results in the deduction of too much tax when the payment is made.”
Financial companies claim the system is run for the benefit of HMRC, not taxpayers.
“It is totally unacceptable that tens of thousands of savers have had to fill in forms to claim back over £300m in overpaid tax in the last three years,” said former pensions minister Steve Webb, who now works for financial firm Royal London.